Dutch Government to Pay $1.6 Billion in Gas Extraction Damages

The Netherlands will spend 1.2 billion euros ($1.6 billion) to compensate for damaged houses and buildings after temblors linked to extraction of natural gas in the Groningen province led to a public backlash.

“There is no doubt anymore that those tremors were caused by gas extraction,” Henk Kamp, minister of Economic Affairs, said today in Loppersum, a village in the Groningen province 127 miles north of Amsterdam. The government will cut gas production by 21 percent to 42.5 billion cubic meters in 2014 and 2015, lowering gas proceeds by 700 million euros this year, 600 million in 2015 and 1 billion in 2016, he said.

The Dutch budget deficit will hit 3.3 percent of gross domestic product in 2014, The Hague-based government’s planning agency CPB said last month. The Netherlands, the European Union’s biggest gas producer, has been in breach of the bloc’s limit of 3 percent of GDP since the beginning of the crisis in 2008. The government and opposition parties reached an accord in October for a 6 billion-euro austerity package for 2014 on top of a four-year, 16 billion-euro cut approved in 2012.

“This spring we will have a complete picture on economic developments, positive developments, adverse developments and then we can make the calculation again,” Finance Minister Jeroen Dijsselbloem said today in The Hague. The consequence of less gas output could lead to additional austerity measures, Dijsselbloem said.

The strength of earthquakes triggered by gas production in the Groningen region where the Slochteren field is located may rise to a magnitude of 5 on the Richter scale, according to a study released in January last year by the State Supervision of Mining at the Ministry of Economic Affairs. An Aug. 16 temblor last year, measuring 3.4, damaged the property of about 2,500 people. The biggest earthquake ever in the Netherlands hit the southern province of Limburg in 1992, reaching 5.8 on the scale.

Earthquake Damage

“This is a big political issue in the Netherlands, so the government has to be seen to be doing something,” Trevor Sikorski, the head of natural gas, coal and carbon at Energy Aspects Ltd., a consulting company in London, said today by telephone. “On the other hand, the Dutch government has budget issues and Groningen gas is a big revenue provider for the Dutch government. It’s a lot of money.”

The Nederlandse Aardolie Maatschappij BV, or NAM, the Dutch gas-production venture of Royal Dutch Shell Plc and ExxonMobil Corp., have said they will compensate all damage resulting from the quakes, caused by a drop in gas pressure leading to subsidence in the ground above. The company has set aside 100 million euros for claims and has paid out about 50 million euros so far. Max van den Berg, the head of the Groningen province council, has said he wants one billion euros as compensation for owners of damaged houses.

Gas Proceeds

The Slochteren field has generated about two-thirds of the more than 200 billion euros in gas proceeds for the Netherlands since its discovery in 1959, according to NAM. Last year, gas production from the Groningen field rose to a record of about 53.8 billion cubic meters, NAM said yesterday.

NAM is allowed to produce 425 billion cubic meters in the 10 years from 2011 through 2020, Karin Donk, a spokeswoman for the State Supervision of Mining, said by phone yesterday. This is on top of 20 billion cubic meters that was unused in the former period, she said.

“A cut in the 2012-2020 production cap of more than 5 percent would move the markets as well as impacting the Dutch trade balance,” Sikorski said in a report before the announcement.

Dutch gas for 2015 has gained 1 percent this week to 26.25 euros/megawatt-hour, it’s first gain in three weeks, according to broker data compiled by Bloomberg.

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